If you've been sifting the markets for high-yield dividend stocks to buy, you've probably noticed Walgreens Boots Alliance(NASDAQ: WBA) offers the highest yield among stocks in the S&P 500 index.
The company behind leading pharmacy chains in the U.S. and Europe lowered its quarterly dividend payout to $0.25 this year, but its stock price has been trading below $10 per share. As a result, investors who buy at recent prices could receive a dividend yield above 10% on their original investment.
Buying top stocks when they're out of favor is one way to beat the market, but investors who try to catch falling knives often get cut to ribbons. Here's a closer look at why Walgreens was beaten down and its path forward to see if it's a smart buy right now.
Why Walgreens stock is falling
Shares of Walgreens collapsed by 64.6% from the end of 2023 through the end of August. The stock is falling because its retail pharmacy chain has been underperforming as a result of pressure from online retailers and pharmacy benefits managers (PBMs).
Walgreens' U.S. pharmacy operation grew sales by 2.3% in its fiscal third quarter that ended May 31. The stock is getting hammered because the profit it receives when filling prescriptions has evaporated. Third-quarter adjusted operating income from the segment plunged by 47.9% year over year to $501 million.
Three PBMs manage around 80% of all prescriptions filled in the United States. All of the top six PBMs operate mail-order and specialty pharmacies that compete with Walgreens. The leading PBM, CVS Health, owns and operates a leading retail pharmacy chain. Walgreens doesn't own a PBM, so expecting profit margin to return to its pharmacy segment seems like wishful thinking.
In addition to the contracting margin in its pharmacy business, Walgreens' attempt to become a leading healthcare service provider through its VillageMD joint venture with Cigna has been a disaster.
In 2022, VillageMD shelled out $8.9 billion for Summit Health-CityMD, which expanded its reach to more than 680 provider locations. In March, VillageMD recorded a $12.4 billion impairment charge, $5.8 billion of which Walgreens absorbed. The U.S. healthcare segment posted an adjusted operating loss of $151 million in the first nine months of 2024.
How Walgreens could bounce back
PBMs collect rebates from pharmaceutical companies in return for preferred placement on their formularies. The Anti-Kickback Statute has been federal law since 1972 and would make the rebates PBMs rely on illegal if not for safe harbor protections.
In July, the Federal Trade Commission (FTC) released a scathing report on the PBM industry that suggests a lawsuit is around the corner. It's a long shot, but in theory, an FTC victory, a removal of the PBM industry's safe harbor protections, or both, could allow Walgreens to compete with pharmacies more directly related to PBMs.
It could be years before the government takes any action regarding the PBM industry, but Walgreens' U.S. healthcare segment is approaching profitability now. The company narrowed the healthcare segment's adjusted operating loss to $22 million in its fiscal third quarter from $172 million in the previous year period.
A recent internal review found that 75% of Walgreens' U.S. stores contribute 100% of that segment's adjusted operating income. Upcoming closures of nonperforming stores could go a long way to improve profitability.
A buy now?
Management lowered its full fiscal year earnings outlook to a range between $2.80 and $2.95 per share when reporting third-quarter results. Walgreens' stock has been beaten down so far that it's trading for just 3.2 times the midpoint of management's recently lowered earnings estimate.
Investors who buy Walgreens stock at its super-low valuation could come out way ahead over the long run even if earnings stagnate. With a healthcare segment approaching profitability, it's easy to see why investors with a high tolerance for risk might want to take a chance on this stock.
Before opening your brokerage application to buy Walgreens, you should know that CEO Tim Wentworth admitted on the last conference call that the current pharmacy model is not sustainable. Swift action from the government could help, but this is a long shot that doesn't factor into any sensible investing strategies. For most income-seeking investors, it's best to watch this company's story play out from a safe distance until we're sure its U.S. pharmacy business can recover.
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Cory Renauer has positions in CVS Health. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.
